What is a risk graph, and is the risk graph for a covered call
identical to that of a naked put?

Hi jmcgregor-ga,

Not much information was located but here is what I found.

"The risk graph or the risk profile is a common visual tool used by
many traders to evaluate risk/reward scenarios before entering a
position. In this two-part series, we discuss the basics of risk
graphs and how to effectively use them to determine the best possible
trade to enter....."
http://www.blonnet.com/iw/2003/02/02/stories/2003020200461200.htm


The Risk Graph
http://www.tassc-solutions.com/downloads/papers/Risk%20and%20Contigency%20Calculations.pdf

http://platinum.optionetics.com/67sec.htm

http://www.dyadem.com/products/pha-pro/sil.htm

http://www.residex.com.au/downloads/api/riskreturn2.pdf

"A risk graph is used to assess risk in order to define the SIL.....'
http://www.hima.com/dokumente/IEC61508_Jan03_E_1503.pdf


http://www.optionvue.com/Articles/ArticleNakedPutWriting.htm


Hope this helps.


best regards,

jeanwil-ga

search words 'risk graph'

It's important to understand that these are nearly polar opposite
options strategies. An investor normally will use a covered call to
insure a gain on shares he has previously purchased. There are two
possibilities:

a. stock rises to or beyond strike price
Call will be exercised. Since he wrote the call, he must turn over his
shares (or buy them at strike price if he doesn't own them). He keeps
the premium on the call, but cannot participate in any further gains.
b.stock stays below strike price (or falls)
Option expires worthless. Investor keeps his shares and option premium
(possibly losing money on his shares if price falls below premium
difference).

A naked put is normally used when an investor wants to purchase a
stock at a discount. He believes a stock is strong, but current
short-term trends in the stock or the market may bring the price down.
Consider these possibilities:

a. stock falls to or below strike price
Since he wrote the put, it will be exercised and he must purchase the
shares at the exercised strike price. He keeps the premium (but
possibly owns a weak stock).
b. stock stays above strike price
Put writer keeps the premium. 

For an introduction to options, there is a good book by Michael C.
Thomsett "Getting Started In Options". It also includes risk graphs.

While the above statement on strategies is essentially correct, the
bottom line is that for a position that is flat today (not long or
short in any way in that security) selling a put and buying stock and
selling call have the exact same profit and loss graph. They are the
exact same position, and oftentimes the sale of a put is better than a
covered call because it is a single transaction (less commission to be
paid) and you can continue to earn interest on the cash required to
set-up the transaction(although the put premium is supposed to account
for this, it does not always).